By BNP Paribas
If you were on vacation during the first fortnight of August and really enjoyed your vacation, you’ll have returned to find global equities where you left them at the end of July (+0.4% for the MSCI AC World index between July 31 and August 16). Your colleagues who were on duty and experienced a black Monday on August 5 after the sudden unwinding of yen carry trades are no doubt a little less relaxed.
Impressive rebound in equities
Last week, optimism prevailed thanks to the publication of economic data in the United States, which reassured investors about inflation and, above all, business activity. After falling sharply at the beginning of August (-6.4% after the first three sessions of the month), global equities quickly regained ground, gaining 3.8% last week and a further 0.9% on Monday August 19. The rebound was widespread.
In the United States, the weekly rise in the S&P 500 index was 3.9% (+0.6% vs. end-July) and that of the Nasdaq Composite 5.3% (+0.2% vs. end-July). The decline in implied volatility was spectacular.
American economy: all well?
Since the publication of the employment report on August 2, which rekindled fears of recession, investor attention has turned back to activity indicators. For the second week running since the unexpected rise in the unemployment rate (from 4.1% to 4.3% in July, the highest since October 2021), jobless claims registrations fell (to 227,000 for the week ending August 10, the lowest since early July), which is not consistent with a worsening employment situation where companies are proceeding with mass layoffs.
Initial data on consumer spending in July were reassuring: retail sales in value terms exceeded expectations for the second consecutive month (+1.0% compared with June, when they fell by just 0.2%). This corresponds to a volume increase of 1.1% for total sales and almost 0.5% for the components that feed into the estimate of private spending in GDP. Following their 2.3% (annualized) rise inQ2, momentum at the start ofQ3 remains solid. The good quarterly results published the same day (Thursday 15th) by the leading supermarket group were also reassuring, as was small business confidence the previous day.
Finally, the producer price index (Tuesday 13) and consumer price indices (Wednesday 14) confirmed the slowdown in inflation. Year-on-year, total inflation came out at 2.9% and underlying inflation at 3.2%, both at their lowest levels since spring 2021. Although the various inflation measures are still above the 2% target, it looks as though the inflationary “parenthesis” may now be closed. On Friday 16th, the preliminary estimate of household confidence measured by the University of Michigan provided a good summary of this “ideal” week. The index exceeded expectations in August (but remains close to its lowest point of the year reached in July), and 1-year and 5-year inflation expectations have stabilized. Growth is resilient, inflation is falling.
What can the US Federal Reserve tell us?
This year’s pre-crisis period will be dominated by central banks, with the publication of theminutes of the July monetary policy meetings of the Fed (Wednesday 21) and ECB (Thursday 22) and the Jackson Hole conference (August 22-24). The theme of this annual gathering of central bankers in Wyoming is “Reassessing the Effectiveness and Transmission of Monetary Policy”. A reassessment of the effectiveness and transmission of monetary policy is perfectly in line with the debates currently driving the financial community. Jerome Powell is scheduled to take the floor on Friday August 23 to present the economic outlook and give indications on the next decision (September 18 meeting). The Fed Chairman will no doubt remain evasive: there is no question of him committing his monetary policy committee (FOMC – Federal Open Market Committee), but he could extend his reflections of recent weeks.
In July, the official FOMC statement mentioned that “in recent months, further progress has been made toward the Committee’s 2% inflation objective”. At the press conference, Jerome Powell emphasized that “the second-quarter inflation figures have reinforced confidence” that inflation was approaching 2%, and added that “better data would further strengthen this confidence”. A few days earlier, before Congress, he had admitted that maintaining an overly restrictive monetary policy “could unduly weaken economic activity and employment”. More recently, several FOMC members made statements suggesting that it was time to adjust the level of key rates.
A cut in key rates in September now seems certain
Futures markets were reflecting almost five cuts (of 25bp) at the beginning of August. These expectations have now eased to 93bp, or just under 4 cuts for the three FOMC meetings scheduled between now and the end of the year. The probability of a 50bp cut in September is now down to around 30%, whereas at the beginning of August, some observers were even envisaging an emergency cut before the FOMC meeting.)
One of Jerome Powell’s main lines of communication at Jackson Hole could be to convince people that a 25bp cut would be more appropriate as part of a moderate approach to the uncertainties that remain, as the Minneapolis Fed President reminded us in a recent interview.
Expectations regarding the European Central Bank’s monetary policy easing have also declined, and now point to two to three rate cuts by the end of the year. These expectations on both sides of the Atlantic also explain the variations in the dollar. The EUR/USD parity rose above 1.10, to its highest level of the year.
In both the USA and the eurozone, a cut in key interest rates in September now seems a foregone conclusion, and the most recent official comments point in this direction. For the time being, the rising geopolitical risk is mainly reflected in the new record highs set by gold prices, which are also based on fundamental factors. This risk is likely to continue to fuel investor nervousness in the months ahead.
